BGC Partners, Inc. — 2012 Form 10-K summary
Entity and period: The supplied filing is for BGC Partners, Inc. (not BGC Group, Inc.) and covers the fiscal year ended December 31, 2012. It is an annual report, not a standalone Q4 filing; quarterly figures below are included where disclosed.
Business context
BGC operates Financial Services, a global wholesale brokerage and trading-technology business, and Real Estate Services, its commercial real estate brokerage and property-management platform, Newmark Grubb Knight Frank. Following the 2012 Grubb & Ellis acquisition, the company reported these as two segments. The 2012 comparison is materially affected by acquisitions, including a full year of Newmark and the addition of Grubb & Ellis from April 2012.
Key financial metrics
Amounts in millions of dollars, except per-share data and percentages.
| Metric | 2012 | 2011 | Change / context |
|---|---|---|---|
| Total revenue | $1,767.0 | $1,464.7 | Up 20.6%; acquisitions and a $52.5 million LME sale gain contributed. |
| Income before income taxes | $55.7 | $54.4 | Up $1.4 million; pre-tax margin was 3.2%, versus 3.7%. |
| Consolidated net income | $35.5 | $38.4 | Down 7.4%. |
| Net income available to common stockholders | $23.9 | $20.1 | Up 18.5%. |
| Basic and fully diluted EPS | $0.16 | $0.17 | Down $0.01 per share. |
| Net cash provided by operating activities | $171.2 | $85.3 | Up $85.9 million. |
| Cash and cash equivalents at year-end | $388.4 | $369.7 | Company-defined cash position, including unencumbered liquidity securities: $420.4 million, up from $385.7 million. |
| Total assets | $1,638.9 | $1,405.2 | Up 16.6%. |
| Notes payable and collateralized borrowings | $451.4 | $345.5 | Up $105.9 million; no short-term borrowings remained at year-end. |
| Dividends declared per share | $0.63 | $0.65 | 2012 quarterly dividend fell from $0.17 in the first half to $0.12 in the second half. |
Cash flow from investing activities was a $68.0 million use; financing activities used $85.0 million. Cash generation included significant non-cash adjustments, including equity compensation and employee-loan amortization. The filing reports $451.4 million of fixed-rate debt at year-end. Debt included $150.0 million of 8.75% convertible notes due 2015, $160.0 million face amount of 4.50% convertible notes due 2016, $112.5 million of 8.125% senior notes due 2042, and secured/lease financing. Interest expense was $34.9 million, up 41.8% year over year. The $130 million revolving facility had no balance outstanding at year-end; the filing also says it had no borrowings outstanding as of March 1, 2013. Regulated subsidiaries held $324.4 million of net assets and had $158.1 million of regulatory net capital in excess of requirements.
Q4 2012: Revenue was $482.2 million, income before taxes $28.8 million, consolidated net income $18.4 million, and net income available to common stockholders $14.2 million. In Q4 2011, these were $355.2 million, $10.8 million, $6.9 million, and $3.8 million, respectively. Q4 2012 revenue included $52.5 million from the LME sale.
Material changes versus 2011
- Financial Services revenue declined 10.8% to $1,221.4 million, and segment pre-tax income fell 25.7% to $214.3 million. The company attributed lower brokerage activity to subdued volatility and trading volumes across asset classes.
- Real Estate Services revenue rose to $454.6 million from $47.7 million, principally reflecting Newmark and Grubb & Ellis acquisitions. Segment pre-tax income was $22.9 million, versus $5.7 million; the 2012 result excludes $21.1 million of acquisition-accounting-related receivables and associated expenses.
- Total compensation and employee benefits increased 29.2% to $1,172.6 million. The increase reflected acquired and expanded headcount and a $127.1 million charge for granting exchangeability on partnership units, versus $108.3 million in 2011.
- Front-office headcount rose more than 17% to 2,528; average revenue per front-office professional declined approximately 18% to $639,000.
Outlook, commentary, risks and unusual items
- Management said it remained confident in growth prospects, citing expansion of the real estate platform, new financial-services opportunities, and investment in electronic trading. It expected longer-term support for rates brokerage from government debt issuance, but near-term pressure from central-bank quantitative easing. No quantified company-wide revenue or earnings guidance is provided in the supplied filing text.
- The company reported a $52.5 million one-time gain on its LME investment sale; the shares had no carrying value. Other unusual items included acquisition-related activity and substantial partnership-unit exchangeability compensation.
- Key risks include market-volume and volatility declines, real estate cyclicality, regulatory and capital changes, customer and product concentration, counterparty and unmatched-principal exposure, technology and cyber disruption, foreign-exchange movements, acquisition integration, and competition for brokers. Rates generated 45.1% of Financial Services brokerage revenue.
- Following FSA reviews, the company undertook a liquidity, capital and controls remediation program. The skilled-person report endorsed the work with limited recommendations; the company considered the program largely concluded and said temporary restrictions on acquisitions and new regulated business lines had been removed.
- Hurricane Sandy disrupted New York operations and adversely affected both segments. The company said the impact could not yet be quantified.
- Litigation included large asserted claims by Tullett-related parties and a shareholder derivative action concerning related-party transactions. Management said, based on available information, pending matters were not expected to have a material adverse effect, but outcomes remained uncertain.
- The company’s dividend policy targets payment of at least 75% of post-tax distributable earnings per fully diluted share, subject to board discretion, liquidity, regulation and other restrictions. Management cautions that distributable earnings is a non-GAAP measure and is not a measure of liquidity or cash available for distribution.
Most important facts for investors to verify
- How much of the 20.6% revenue increase and improved common-stockholder income reflects acquisitions and the nonrecurring LME gain, rather than underlying growth.
- Whether Financial Services brokerage revenue and profitability stabilize, and whether electronic trading growth offsets weaker market volumes.
- Real Estate Services’ post-acquisition margins, integration costs, cash conversion and performance excluding acquisition-accounting effects.
- Debt service, refinancing and liquidity capacity, including restrictions on regulated-subsidiary capital and the status and terms of the revolving facility after its June 2013 maturity.
- Potential dilution from convertible notes, partnership-unit exchanges and controlled equity offerings, alongside the effects of the company’s concentrated Cantor voting control and related-party arrangements.
- Developments in material litigation and regulatory matters, and completion of Grubb & Ellis integration and internal-control assessment. The auditor issued unqualified opinions; Grubb & Ellis was excluded from the 2012 internal-control assessment.